January 7, 2008

Even though investors, entrepreneurs and industry leaders say the current technological bubble is different from the one in 1999, things are starting to get out of hand:

SugarCRM: Raises $14.5 Million

Ice.com: Raises $47 Million

Pudding Media: Raises $8 Million

Meraki Networks: Raises $20 Million

Affinity Labs: Acquired for $61 Million

Moniker: Acquired for $65 Million

Onaro: Acquired for $120 Million

Apertio: Acquired for $206.5 Million

XIV: Acquired for $350 Million

All those deals come from last week’s Techcrunch posts. I just did a quick search at TechCrunch’s archive from 2006 and I found some interesting statistics. Lets compare the ratio of deadpooled startups in 2006 versus deadpooledstartups in 2007:

Granted that counting TechCrunch posts isn’t rocket science and that might not be the most accurate data source. Nevertheless, it’s quite interesting to see that the number of companies that went out of business this year is 4 times higher than in 2006. I haven’t counted the number of launches in 2006, but I guess the number is quite smaller than in 2007 (34 of them reported by TechCrunch).

The number of millions invested in tech companies also suffered an acute increment. In 2006 the investment ranged from $3 to $15 Millions with an average investment of $12.94 Million (all data taken from TechCrunch’s archive of 2006, and don’t reflect exact numbers at all but just a quick, probably biased, approximation).

A comparison with the investments I showed at the top (an average of $22.37 Million) makes my mind blow. In 2007 the number of investments, and the total amount of money per investment grew considerably (these approximated values don’t account for Facebook’s recent investments which would only rise the average).

What is the problem with this you might think? Well, not much at first. It’s great that so many companies are getting investments. It’s a good indicator of strong economical growth in the tech industry. The problem arises when companies start getting valued higher than they really are. It’s true that it’s very hard to valuate a company, specially a dot com company with millions of users but no revenues, but some of the acquisitions and investments are just crazy.

On one side it’s great news for all entrepreneurs like myself. It’s getting easier to get investment and it’s also easy to reach a good exit deal thanks to all the acquisitions we are seeing. On the other side, it’s a dangerous situation. I reckon we won’t experience a bubble burst as big as the one in 1999, but when this trend stops we’ll have to face hundreds of deadpooled companies and many VCs will lost big amounts of cash. As a side effect, hundreds or even thousands of engineers will be laid off. I don’t like apocalyptic visions, but I’m afraid there is way too much expectation and we will suffer this. As many economist know, the market will self regulate itself. Just watch and see!